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The EU referendum - the legal implications

On 23 June 2016, the British electorate will vote on whether the United Kingdom should remain a member of the European Union or leave the European Union.

A decision to leave will not only change the UK’s economic and political relationship with the rest of Europe; it will also have significant legal implications.

This article outlines the way in which European law operates in the UK currently and some possible ways in which this may change after the referendum.

European law in the UK today

European law is given effect in the UK by the European Communities Act 1972, which came into force when we joined the European Economic Community (as it then was) on 1 January 1973. The European Communities Act has three principal effects as far as UK law is concerned.

First, the EU Treaties and EU Regulations are given legal force in the UK by a process known as direct effect. This means they are enforceable by the UK courts without the need for any domestic implementation.

Secondly, any government minister or department may implement European Directives in the UK. This is usually done by domestic regulations made by way of statutory instrument, of which some tens of thousands have been made since we joined the EU.

Thirdly, UK law is construed and has effect subject to European law, including the decisions of the European Court of Justice in Luxembourg. This principle was confirmed in the Factortame litigation of the 1990s, in which provisions of the Merchant Shipping Act 1995 relating to fishing quotas were disapplied by the House of Lords because they were found to be incompatible with European law.

The result of the European Communities Act is that the effect of European law in the UK is wide-ranging, covering such areas as financial services, intellectual property, employment and the environment.

If the UK remains in the EU: the new settlement

The UK has recently negotiated a new settlement with the EU, embodied in a Decision of the European Council made on 19 February 2016. The new settlement, which is legally binding, will come into effect if the UK decides to remain in the EU, and covers the following areas:

Economic governance – countries within the euro area will have to respect the rights of member states that have not adopted the euro and will be prohibited from discriminating on the basis of a state’s official currency. Countries outside the euro area will not have to contribute to measures to safeguard the financial stability of the euro.

Competitiveness – the EU institutions and member states will take concrete steps towards better regulation, including lowering administrative burdens, especially on small and medium enterprises.

Sovereignty – it is recognised that the UK is not committed to further European integration, and confirmed that references in the Treaties to creating ‘an ever closer union among the peoples of Europe’ do not offer a basis for extending the scope of EU law; while some member states may move to further integration, others may choose not to participate. When new EU legislation is proposed, if there are objections representing more than 55% of votes allocated to national parliaments, the draft legislation will not be progressed unless it is amended to accommodate the concerns raised. European measures in the area of freedom, security and justice will not bind the UK unless the UK so wishes.

Social benefits and free movement – the free movement of workers may be restricted if necessary for overriding reasons of public interest and member states may protect themselves against individuals posing a threat to public policy or security. Conditions may be imposed in relation to certain benefits, and member states will in future be able to index child benefits exported to another member state to the conditions of the member state in which the child resides. If there is an exceptionally large inflow of workers, a member state may apply to limit access to non-contributory in-work benefits for up to four years from the commencement of employment, for a period of seven years.

If the UK leaves the EU: possible scenarios

If the UK votes to leave the EU, the parties will have two years from the date on which notice is given in which to negotiate an agreement governing the UK’s withdrawal from the EU and its future relationship with it. If agreement is not reached, withdrawal will occur automatically at the end of the two-year period, unless an extension is agreed.

Among the possible future relationships between the UK and the EU are the following, though it is equally possible that a bespoke arrangement will be negotiated.

European Economic Area – the UK could leave the EU but remain part of the European Economic Area ("EEA") in a position similar to that of Norway (which itself rejected EU membership in referendums held in 1972 and 1994). In this scenario, the UK would retain access to the single market and free movement of goods, services, people and capital. The UK would continue to be obliged to follow EU law in such areas as employment rights, labelling standards, competition policy, state aid, the environment and financial services; the EEA agreement also has its own provisions relating to the free movement of workers and the right of those exercising free movement to domestic social security schemes. The UK would continue to contribute to the EU budget, as well as to those of the EEA and the European Free Trade Association ("EFTA").

As an EEA member, the UK would no longer have to adopt the EU’s common foreign and security policy, commercial, transport or energy policies, nor EU legislation in sectors such as agriculture, fisheries, foreign and security policy and justice and home affairs. Nor would the UK be covered by the common trade policy on trade with third countries. There would be no formal access to EU decision-making processes, apart from participation in some committees of the European Commission. The UK would not have access to the European Court of Justice; instead, EEA members participate in the EFTA Court (also based in Luxembourg). While the EFTA Court is itself bound by decisions of the ECJ, its own rulings are advisory rather than having binding effect.

European Free Trade Association – alternatively, the UK could rejoin EFTA, of which we were founder members from 1960 to 1973, without remaining in the EEA. The model here is Switzerland, which rejected EEA membership in a referendum in 1992. Switzerland is not part of the single market or subject to its legislation. Instead, it has negotiated over 120 separate agreements with the EU, which enable free movement of goods and require that goods exported to the EU have to meet European regulatory requirements; free movement of services is not covered, however. Although Switzerland is not required to adopt relevant EU legislation, in practice it usually reproduces it domestically, since equivalent legislation is necessary for the agreements to function; Switzerland is also subject to EU rules relating to state aid. Because the several agreements need frequent updating, the EU has said that, in future, a framework agreement will need to be agreed. The Swiss contribution to the EU budget is much less than that of the EEA member states.

Customs union – Turkey, which is not yet an EU member, has been in a customs union with the EU since 1996. If this model were adopted, most EU law would cease to have effect in the UK, though EU standards for goods would still apply and it may be that domestic law would continue to be harmonised with EU law in relation to such matters as intellectual property, competition and consumer protection. Turkey has also adopted the EU’s common external tariff on imports from outside the EU and is consequently restricted in its ability to conclude agreements with other countries without the EU’s consent.

Free trade agreement – another possibility is that the UK would negotiate a bilateral free trade agreement with the EU, or possibly a series of such agreements covering different business sectors. Recent examples include Singapore and Canada, and the EU is currently negotiating the Transatlantic Trade and Investment Partnership with the US. Again, any products sold to the EU would continue to be subject to EU legislation, and the UK may still be required to conform to certain EU provisions relating to employment and social protection. Negotiating such an agreement may be a lengthy process, especially in relation to services, with much depending on the approach taken by the EU and the remaining member states. It would also be necessary for the UK to negotiate separate agreements with other countries currently covered by EU trade agreements.

World Trade Organisation – members of the WTO apply the most favoured nation principle, so that exporters can trade with another member country on the best terms offered to any other member country. This would give the UK control over its own trade policy with no need to contribute to the EU budget, and EU law would not apply in the UK. Exports from the UK to the EU would face tariffs and exporters would have to meet EU product standards; there are also some rules relating to state subsidies. The WTO arrangements are of limited benefit in relation to services, which are a significant export for the UK.

If the UK leaves the EU: implications for UK law generally

Whatever model is adopted for the UK’s future relationship with the EU, if we vote to leave, Parliament will be asked to repeal the European Communities Act, including its provisions relating to the direct effect of European Treaties and Regulations, domestic implementation of European Directives, and the supremacy of European law.

However, immediate repeal of all the statutory instruments implementing European Directives seems unlikely, since it would result in a legislative vacuum and consequent legal uncertainty. It is therefore likely that the Act providing for the UK’s withdrawal from the EU would include a saving provision so that statutory instruments implementing European Directives that are currently in force will be retained for the time being. A similar approach could be taken to current European Regulations, which would be given a status equivalent to UK statutory instruments.

This would allow time for the government to review all such provisions, deciding whether to repeal them, retain them, or retain them with modifications, in the light of the UK’s future relationship with the EU and domestic policy in the areas concerned. If it is decided that the UK is to continue to have access to the single market, some European legislation will need to be retained (and indeed updated as European law develops). In this scenario, the effect of withdrawal from the EU is likely to be less radical than is sometimes supposed.

Whatever is decided, given the amount of European law currently in force in the UK, the process of reviewing it all would be a very substantial exercise indeed, taking several years to complete. Where EU-derived legislation gives a regulatory role to European supervisory authorities, it would need to be amended so as to refer to their UK equivalents. In some areas, such as the environment, policy would need to be developed by the devolved administrations in Scotland, Wales and Northern Ireland.

The courts would no longer be obliged to follow European jurisprudence, but may continue to look to decisions of the European Court of Justice for guidance when construing UK legislation that is derived from European law.

If the UK leaves the EU: some implications for specific sectors

Financial services – nearly all UK financial services legislation is based on EU law. It seems unlikely that these provisions would be radically reformed, and the Treasury and Financial Conduct Authority may choose to require equivalent standards. However, the current passporting provisions, by which a firm authorised in the UK may carry on business in any other member state, would no longer apply. In order to operate in the EU, a UK firm would need to establish branches in the other member states, or set up an EU subsidiary with passporting rights. To maintain the position of London as a major financial services centre, it may be that the UK would seek to negotiate recognition of its regulatory regime as equivalent to the that of the EU, along with a bespoke form of passporting for UK firms.

Commercial contracts – it is possible that changes to trade arrangements after withdrawal from the EU may make some commercial contracts unprofitable, for example where there are product sales or supply chains in the EU, or in other countries with which the EU has trade agreements. In some cases, a provision of European law could be so essential to the operation of the contract as to make it impossible for the contract to be performed as intended. Where this is so, a party may seek to invoke a contract’s force majeure provisions to bring the contract to an end.

Disputes – the freedom of parties to choose the governing law of a contract (currently governed by the Rome I Regulation) is likely to continue. The position with regard to the governing law of non-contractual claims, such as negligence (currently governed by Rome II), is more complex, and it may be that the applicable law would be that of the country in which the tort occurred rather than that of the parties’ choice. As far as jurisdiction (currently governed by the Recast Brussels Regulation) is concerned, it is likely that the English courts would continue to uphold the parties’ choice; treatment by other member states would be a matter for their own domestic law, unless the UK accedes to the Lugano Convention (in force between the EU and the EFTA states) in its own right. The streamlined EU process for enforcing a judgment in another member state would no longer be available.

Intellectual property – the UK would continue to participate in the European Patent Convention, which is not part of the EU. However, the new Unitary Patent, in process of being implemented, would not cover the UK, though British patentees would be able to apply for it. Unless a special arrangement is negotiated, the UK trade mark regime would become wholly separate from that of the EU, perhaps with a period of grace in which owners of EU trade marks could apply to have them converted into UK marks, as happened when the Republic of Ireland became independent in 1922.

Data protection – on withdrawal, the UK would cease to belong to the EU safe data zone, becoming instead a third country. The UK could request an adequacy decision from the EU, though to maintain such a status in the longer term it would be necessary to update UK data protection laws to achieve equivalence to the new EU’s new General Data Protection Regulation, which is due to come into force in 2018.

Tax – outside the EU, the UK would have greater freedom to enact tax regimes benefiting selected businesses that would be contrary to the EU’s current state aid regime. In the longer term, it is likely that the policy of the Organisation for Economic Co-operation and Development, which aims to create an improved system of taxation for international business, will have increasing influence on both EU and UK corporate tax legislation.